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FFIN > SEC Filings for FFIN > Form 10-Q on 29-Apr-2014All Recent SEC Filings




Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Form 10-Q contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this Form 10-Q, words such as "anticipate," "believe," "estimate," "expect," "intend," "predict," "project," and similar expressions, as they relate to us or management, identify forward-looking statements. These forward-looking statements are based on information currently available to our management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors, including, but not limited to, those listed in "Item 1A- Risk Factors" in our Annual Report on Form 10-K and the following:

general economic conditions, including our local, state and national real estate markets and employment trends;

volatility and disruption in national and international financial markets;

government intervention in the U.S. financial system including the effects of recent legislative, tax, accounting and regulatory actions and reforms, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), the Jumpstart Our Business Startups Act, the Consumer Financial Protection Bureau and the capital ratios of Basel III as adopted by the federal banking authorities;

political instability;

the ability of the Federal government to deal with the slowdown of the national economy and the fiscal cliff;

competition from other financial institutions and financial holding companies;

the effects of and changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (the "Federal Reserve");

changes in the demand for loans;

fluctuations in the value of collateral securing our loan portfolio and in the level of the allowance for loan losses;

the accuracy of our estimates of future loan losses;

the accuracy of our estimates and assumptions regarding the performance of our securities portfolio;

soundness of other financial institutions with which we have transactions;

inflation, interest rate, market and monetary fluctuations;

changes in consumer spending, borrowing and savings habits;

our ability to attract deposits;

changes in our liquidity position;

changes in the reliability of our vendors, internal control system or information systems;

our ability to attract and retain qualified employees;

acquisitions and integration of acquired businesses;

the possible impairment of goodwill associated with our acquisitions;

consequences of continued bank mergers and acquisitions in our market area, resulting in fewer but much larger and stronger competitors;

expansion of operations, including branch openings, new product offerings and expansion into new markets;

changes in compensation and benefit plans; and

acts of God or of war or terrorism.

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Such forward-looking statements reflect the current views of our management with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this paragraph. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise.


As a financial holding company, we generate most of our revenue from interest on loans and investments, trust fees, and service charges. Our primary source of funding for our loans and investments are deposits held by our subsidiary bank. Our largest expenses are interest on these deposits, salaries and related employee benefits. We usually measure our performance by calculating our return on average assets, return on average equity, our regulatory leverage and risk based capital ratios and our efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income on a tax equivalent basis and noninterest income.

The following discussion of operations and financial condition should be read in conjunction with the financial statements and accompanying footnotes included in Item 1 of this Form 10-Q as well as those included in the Company's 2013 Annual Report on Form 10-K.

Critical Accounting Policies

We prepare consolidated financial statements based on generally accepted accounting principles and customary practices in the banking industry. These policies, in certain areas, require us to make significant estimates and assumptions.

We deem a policy critical if (1) the accounting estimate required us to make assumptions about matters that are highly uncertain at the time we make the accounting estimate; and (2) different estimates that reasonably could have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on the financial statements.

We deem our most critical accounting policies to be (1) our allowance for loan losses and our provision for loan losses and (2) our valuation of securities. We have other significant accounting policies and continue to evaluate the materiality of their impact on our consolidated financial statements, but we believe these other policies either do not generally require us to make estimates and judgments that are difficult or subjective, or it is less likely they would have a material impact on our reported results for a given period. A discussion of (1) our allowance for loan losses and our provision for loan losses and (2) our valuation of securities is included in note 5 and note 4, respectively, to our notes to consolidated financial statements (unaudited) which begins on page 9.

Stock Split

On April 22, 2014, the Company's Board of Directors declared a two-for-one stock split in the form of a 100% stock dividend effective for shareholders of record on May 15, 2014 to be distributed on June 2, 2014. All per share amounts in this report have been restated to reflect this stock split. An amount equal to the par value of the additional common shares to be issued pursuant to the stock split was reflected as a transfer from retained earnings to common stock on the consolidated financial statements as of and for the three months ended March 31, 2014.

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Acquisition of Orange Savings Bank, SSB

On February 9, 2013, we entered into an agreement and plan of merger to acquire Orange Savings Bank, SSB. On May 31, 2013, the transaction was completed. Pursuant to the agreement, we paid $39.20 million in cash and issued 420,000 shares of the Company's common stock in exchange for all of the outstanding shares of Orange Savings Bank, SSB.

At closing, Orange Savings Bank, SSB, was merged into First Financial Bank, N.A., Abilene, Texas, a wholly owned subsidiary of the Company. The total purchase price exceeded the estimated fair value of assets acquired by approximately $23.02 million and was recorded by the Company as goodwill.

Results of Operations

Performance Summary. Net earnings for the first quarter of 2014 were $22.34 million compared to $18.58 million for the same period in 2013, or a 20.23% increase.

Basic earnings per share for the first quarter of 2014 were $0.35 compared to $0.29 for the same quarter last year. The return on average assets was 1.74% for the first quarter of 2014, as compared to 1.71% for the same quarter of 2013. The return on average equity was 15.02% for the first quarter of 2014 as compared to 13.41% a year ago.

Net Interest Income. Net interest income is the difference between interest income on earning assets and interest expense on liabilities incurred to fund those assets. Our earning assets consist primarily of loans and investment securities. Our liabilities to fund those assets consist primarily of noninterest-bearing and interest-bearing deposits.

Tax-equivalent net interest income was $51.80 million for the first quarter of 2014, as compared to $42.47 million for the same period last year. The increase in 2014 compared to 2013 was largely attributable to the increase in volume of interest earning assets. Average earning assets increased $745.76 million for the first quarter of 2014 over the same period in 2013. Average tax exempt securities and average loans increased $168.00 million and $578.34 million, respectively, for the first quarter of 2014 over the first quarter of 2013. Average interest bearing liabilities increased $651.89 million for the first quarter of 2014, as compared to the same period in 2013. The yield on earning assets increased 13 basis points during the first quarter of 2014, whereas the rate paid on interest-bearing liabilities decreased 1 basis point in the first quarter of 2014 primarily due to the effects of lower interest rates.

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Table 1 allocates the change in tax-equivalent net interest income between the amount of change attributable to volume and to rate.

Table 1 - Changes in Interest Income and Interest Expense (in thousands):

                                               Three Months Ended March 31, 2014
                                                 Compared to Three Months Ended
                                                         March 31, 2013
                                              Change Attributable to           Total
                                             Volume             Rate          Change

    Short-term investments                 $      (107 )      $      17       $   (90 )
    Taxable investment securities                  507              202           709
    Tax-exempt investment securities (1)         2,051               94         2,145
    Loans (1) (2)                                7,327             (623 )       6,704

    Interest income                              9,778             (310 )       9,468

    Interest-bearing deposits                      186             (113 )          73
    Short-term borrowings                           21               38            59

    Interest expense                               207              (75 )         132

    Net interest income                    $     9,571        $    (235 )     $ 9,336

(1) Computed on a tax-equivalent basis assuming a marginal tax rate of 35%.

(2) Non-accrual loans are included in loans.

The net interest margin for the first quarter of 2014 was 4.32%, an increase of 13 basis points from the same period in 2013. Although interest rates have continued to remain at historically low levels, the Company is beginning to see improvements in its net interest margin. This improvement is a result of our continued efforts to mitigate the impact of low short-term interest rates by establishing minimum interest rates on certain of our loans, improving the pricing for loan risk, reducing rates paid on interest bearing deposits and increases in the overall reinvestment rate of our security portfolio. We expect interest rates to remain at the current low levels based on comments made by the Federal Reserve, which will continue to place pressure on our interest margin.

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The net interest margin, which measures tax-equivalent net interest income as a percentage of average earning assets, is illustrated in Table 2.

Table 2 - Average Balances and Average Yields and Rates (in thousands, except percentages):

                                                                Three Months Ended March 31,
                                                      2014                                       2013
                                        Average        Income/      Yield/         Average        Income/      Yield/
                                        Balance        Expense       Rate          Balance        Expense       Rate


Short-term investments (1)            $    54,426      $     87        0.68 %    $   137,595      $    176        0.56 %
Taxable investment securities (2)       1,121,296         7,084        2.53        1,038,706         6,375        2.45
Tax-exempt investment securities
(2)(3)                                    992,947        12,218        4.92          824,947        10,073        4.88
Loans (3)(4)                            2,689,474        33,450        5.04        2,111,138        26,747        5.14

Total earning assets                    4,858,143        52,839        4.41 %      4,112,386        43,371        4.28 %
Cash and due from banks                   147,583                                    129,945
Bank premises and equipment, net           95,702                                     85,476
Other assets                               44,969                                     46,417
Goodwill and other intangible
assets, net                                97,493                                     71,968
Allowance for loan losses                 (34,438 )                                  (34,900 )

Total assets                          $ 5,209,452                                $ 4,411,292

Liabilities and Shareholders'
Interest-bearing deposits             $ 2,817,181      $    941        0.14 %    $ 2,320,932      $    868        0.15 %
Short-term borrowings                     426,204            96        0.09          270,561            37        0.06

Total interest-bearing liabilities      3,243,385         1,037        0.13 %      2,591,493           905        0.14 %
Noninterest-bearing deposits            1,329,103                                  1,205,522
Other liabilities                          33,749                                     52,630

Total liabilities                       4,606,237                                  3,849,645
Shareholders' equity                      603,215                                    561,647

Total liabilities and shareholders'
equity                                $ 5,209,452                                $ 4,411,292

Net interest income                                    $ 51,802                                   $ 42,466

Rate Analysis:
Interest income/earning assets                                         4.41 %                                     4.28 %
Interest expense/earning assets                                        0.09                                       0.09

Net yield on earning assets                                            4.32 %                                     4.19 %

(1) Short-term investments are comprised of Fed Funds sold, interest-bearing deposits in banks and interest-bearing time deposits in banks.

(2) Average balances include unrealized gains and losses on available-for-sale securities.

(3) Computed on a tax-equivalent basis assuming a marginal tax rate of 35%.

(4) Non-accrual loans are included in loans.

Noninterest Income. Noninterest income for the first quarter of 2014 was $16.41 million, an increase of $2.45 million over the same period in 2013. Trust fees increased $783 thousand, ATM, interchange and credit card fees increased $714 thousand and service charges on deposit accounts increased $152 thousand. The increase in trust fees reflects an increase in fees from mineral management as well as assets under management over the prior year from both market value growth and growth in assets managed. The fair value of our trust assets managed, which are not reflected in our consolidated balance sheets, totaled $3.47 billion at March 31, 2014 as compared to $3.02 billion a year ago. The increases in ATM, interchange and credit card fees and service charges on deposit accounts is primarily a result of an increase in the number of accounts and from our Orange acquisition. Also included in noninterest income in the first quarter of 2014 was a $605 thousand gain on the settlement of a bank owned life insurance contract and gains of $452 thousand on the sale of foreclosed assets compared to losses of $316 thousand in the same period a year ago.

Offsetting these increases were decreases in real estate mortgage fees of $360 thousand, net gain on sale of available-for-sale securities of $226 thousand and net gain on sale of assets of $165 thousand. The decline in real estate mortgage fees is a result of the overall decline in mortgage refinance activity.

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Table 3 - Noninterest Income (in thousands):

                                                               Three Months Ended
                                                                   March 31,
                                                    2014           (Decrease)           2013

Trust fees                                        $  4,576        $        783        $  3,793
Service charges on deposit accounts                  4,047                 152           3,895
ATM, interchange and credit card fees                4,443                 714           3,729
Real estate mortgage operations                      1,024                (360 )         1,384
Net gain (loss) on sale of available-for-sale
securities                                              (4 )              (226 )           222
Net gain (loss) on sale of foreclosed assets           452                 768            (316 )

Check printing fees                                     57                   7              50
Safe deposit rental fees                               190                  25             165
Credit life and debt protection fees                    26                 (14 )            40
Brokerage commissions                                  229                 120             109
Interest on loan recoveries                            281                  43             238
Gain on sale of assets                                   3                (165 )           168
Miscellaneous income                                 1,081                 598             483

Total other                                          1,867                 614           1,253

Total Noninterest Income                          $ 16,405        $      2,445        $ 13,960

Noninterest Expense. Total noninterest expense for the first quarter of 2014 was $32.45 million, an increase of $4.98 million, or 18.12%, as compared to the same period in 2013. An important measure in determining whether a financial institution effectively manages noninterest expenses is the efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income on a tax-equivalent basis and noninterest income. Lower ratios indicate better efficiency since more income is generated with a lower noninterest expense total. Our efficiency ratio for the first quarter of 2014 was 47.57%, compared to 48.68% from the same period in 2013.

Salaries and employee benefits for the first quarter of 2014 totaled $17.41 million, an increase of $2.23 million compared to 2013. The increase was largely the result of additional employees to staff new branches, annual pay increases, our Orange acquisition and an increase in health care expenses.

All other categories of noninterest expense for the first quarter of 2014 totaled $15.04 million, an increase of $2.74 million, or 22.32%, as compared to the same period in 2013. Other categories of noninterest expense with increases included net occupancy and equipment expense, printing, stationary and supplies expense, professional and service fees and advertising, primarily all resulting from our Orange acquisition.

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Table 4 - Noninterest Expense (in thousands):

                                                         Three Months Ended
                                                              March 31,
                                                 2014        (Decrease)         2013

   Salaries                                    $ 12,856     $      1,475      $ 11,381
   Medical                                        1,490              473         1,017
   Profit sharing                                 1,217              138         1,079
   Pension                                          130              (78 )         208
   401(k) match expense                             430               49           381
   Payroll taxes                                  1,145              119         1,026
   Stock option expense                             146               58            88

   Total salaries and employee benefits          17,414            2,234        15,180

   Net occupancy expense                          2,234              468         1,766
   Equipment expense                              2,622              341         2,281
   FDIC assessment fees                             659               87           572
   ATM, interchange and credit card expense       1,480              140         1,340
   Professional and service fees                  1,080              277           803
   Printing, stationery and supplies                775              303           472
   Amortization of intangible assets                 75               65            10

   Data processing fees                              74               15            59
   Postage                                          413               35           378
   Advertising                                      848              296           552
   Correspondent bank service charges               228               26           202
   Telephone                                        549              147           402
   Public relations and business development        527               85           442
   Directors' fees                                  234                3           231
   Audit and accounting fees                        404               23           381
   Legal fees                                       158               15           143
   Regulatory exam fees                             227               30           197
   Travel                                           198               27           171
   Courier expense                                  152              (36 )         188
   Operational and other losses                     448              256           192
   Other real estate                                 53              (64 )         117
   Other miscellaneous expense                    1,596              204         1,392

   Total other                                    6,109            1,062         5,047

   Total Noninterest Expense                   $ 32,448     $      4,977      $ 27,471

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Balance Sheet Review

Loans. Our portfolio is comprised of loans made to businesses, professionals, individuals, and farm and ranch operations located in the primary trade areas served by our subsidiary bank. Real estate loans represent loans primarily for new home construction and owner-occupied commercial real estate. The structure of loans in the real estate mortgage area generally provides re-pricing intervals to minimize the interest rate risk inherent in long-term fixed rate loans. As of March 31, 2014, total loans held for investment were $2.69 billion, an increase of $4.00 million, as compared to December 31, 2013. As compared to December 31, 2013, commercial loans increased $10.55 million, agricultural loans decreased $10.81 million, real estate loans increased $2.29 million, and consumer loans increased $1.97 million. Loans averaged $2.69 billion during the first quarter of 2014, an increase of $578.34 million from the prior year first quarter average balances.

Table 5 - Composition of Loans (in thousands):

                                                March 31,               December 31,
                                          2014            2013              2013

     Commercial                        $   607,281     $   513,422     $      596,730
     Agricultural                           65,121          55,247             75,928
     Real estate                         1,680,807       1,275,564          1,678,514
     Consumer                              335,079         283,782            333,113

     Total loans held-for-investment   $ 2,688,288     $ 2,128,015     $    2,684,285

At March 31, 2014, our real estate loans represent approximately 62.52% of our loan portfolio and are comprised of (i) 1-4 family residence loans of 46.85%,
(ii) commercial real estate loans of 30.07%, generally owner occupied,
(iii) other loans, which includes ranches, hospitals and universities, of 13.63%, (iv) residential development and construction loans of 6.68%, which includes our custom and speculation home construction loans and (v) commercial development and construction loans of 2.77%.

Loans held for sale, consisting of secondary market mortgage loans, totaled $10.43 million, $10.12 million and $5.16 million at March 31, 2014 and 2013, and December 31, 2013, respectively, which were recorded at cost as fair value exceeded cost.

Asset Quality. The loan portfolio of our bank subsidiary is subject to periodic reviews by our centralized independent loan review group as well as periodic examinations by bank regulatory agencies. Loans are placed on non-accrual status when, in the judgment of management, the collectability of principal or interest under the original terms becomes doubtful. Non-accrual, past due 90 days still accruing and restructured loans plus foreclosed assets were $27.55 million at March 31, 2014, as compared to $25.72 million at March 31, 2013 and $31.13 million at December 31, 2013. As a percent of loans and foreclosed assets, these assets were 1.02% at March 31, 2014, as compared to 1.20% at March 31, 2013 and 1.16% at December 31, 2013. As a percent of total assets, these assets were 0.52% at March 31, 2014 as compared to 0.58% at March 31, 2013 and 0.60% at December 31, 2013. We believe the level of these assets to be manageable and are not aware of any material classified credits not properly disclosed as nonperforming at March 31, 2014. The increase in dollar amount of nonperforming loans in the first quarter of 2014 and fourth quarter of 2013 compared to the first quarter of 2013 was primarily from our Orange acquisition.

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Table 6 - Non-accrual, Past Due 90 Days Still Accruing and Restructured Loans and Foreclosed Assets (in thousands, except percentages):

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